HFF Research Update for November 11, 2016: Flemish Poppies

Friday, November 11, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

Ninety-eight years ago, World War I ended at the eleventh hour on the eleventh day of the eleventh month. Across the world today, nations are honoring soldiers who died in battle. Here in America, we opt to celebrate our fallen military in May, and celebrate all veterans on the 11th of November.

To take liberty with my stage, I believe it is unfortunate that America only spends one day remembering those who died in our defense. In some countries, entire weeks are dedicated to the fallen's commemoration. In the United Kingdom, for example, citizens commonly wear the Royal British Legion poppy flower pinned to their chests for more than a week. The red of the flower petal represents the blood shed on the battlefield; the black stamen, the mourning of those whose loved ones never returned home alive; and the green leaf, the new beginning that rises from the destruction of war. It is a relatively silent but eloquently prideful homage.

The poppy flower’s significance derives from the poem “In Flanders Fields”, written by Canadian Lieutenant-Colonel John McCrae, its composition inspired by the loss of a fellow soldier in World War I.

Take two minutes today to read the poem and silently remember those departed. Our days are not so hard.

“In Flanders Fields”

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

A sell-off in government bonds continues as investors assume a risk-on approach to equity markets. The Bloomberg & Barclay’s Aggregate Total Return Index, which we highlighted earlier this fall, is reporting a 4.85 percent decline since the index peaked in late August – reflecting a global unwinding of fixed income positions not seen since March. Many have attributed the surge in stocks and sell-off in bonds to a warm reception from investors to Trump’s plans for tax cuts and infrastructure spending, previously estimated by the President-Elect to total $550 billion by 2021.

Government bond yields in the United Kingdom, Germany, and the United States have risen significantly since the election. The 10-year German Bund (+45 bps), 10-year UST (+59 bps) and 10-year UK Gilt (+69 bps) are all sharply higher than lows experienced at the end of September. Though interest rates are rising unilaterally, the sovereign debt of several countries is still yielding negative interest rates, as the updated chart below manifests.

China’s stock bourses have entered a bull market. Closing Friday’s trading session at 3,196, the Shanghai Composite Index has increased 20.4 percent since its January low and, having climbed in each of the past five weeks, is experiencing the longest gains since May 2015. Additionally, the Shenzhen Composite Index closed at 2,108, also more than 20 percent higher than January lows. Gains have been led by commodity producers and construction companies as the government boosts spending to support growth.

Emerging markets outside China have not experienced such a positive outcome. The developed world is underwriting inflationary pressure. For now, the markets remain well ahead of reality.

In contrast to the immediate pain associated with higher borrowing costs, the U.S. real estate market is taking signals its NOI could expand further.

In light of this, on Monday we will review the implications of higher borrowing costs on property values in a status quo NOI environment.

About Jimmy Hinton

Jimmy Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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